InvenSense A Decent Speculative Growth Stock

Jul.11.12 | About: InvenSense (INVN)

I was going to write on how InvenSense (INVN) might make for a decent growth stock, especially given the catalyst of it being present in Google's (GOOG) Nexus 7 tablet. However, upon seeing that it depended on Nintendo for 31% of its net revenue for fiscal year 2012, I'll have to make a qualification in the end.

A superficial look shows InvenSense going the wrong way, having been cut in half since March. Its earnings estimates were also cut somewhat, with its fiscal year ending March 2013 going from $0.63 per share to $0.59. This means that INVN is trading at a 17.2 times forward P/E. Not incredibly cheap for sure.

But INVN, which sells MEMS motion sensor chips (gyroscopes, accelerometers) is growing quite steadily, with estimates being for revenues to expand 40% this fiscal year. These chips go into every tablet and smartphone that will be produced going forward, though there's competition from several quarters, such as STMicroelectronics (STM) and Analog Devices (ADI).

That said, through iSuppli's teardown of the Google Nexus 7 tablet, we learned today that INVN got a good design win there. While the revenues coming from this product might not change INVN's market position greatly (since smartphones sell in much greater numbers and there's the Nintendo problem), if the Nexus 7 tablet turns a winner, INVN might well benefit from association. And obviously, at this point Nexus 7 does seem like a winner, even if Apple's (AAPL) rumored "mini-iPad" or Amazon.com's (AMZN) upcoming Kindle fire 2 might still pose a challenge.

Indeed, it is the fact that there's competition in the end market and also the fact that the Nexus 7 will also see competition, as well as the Nintendo problem, that make me label INVN speculative. Still the reasonable valuation, rather low market capitalization ($830 million), growth prospects and segment attractiveness do make it seem like a decent growth stock, with the added kicker that some other semiconductor company might see an easy market entrance in acquiring INVN.

The Nintendo Problem

INVN relied on Nintendo for 31% of its revenues in fiscal year 2012. Now, I sincerely believe the Wii-U will be a dog. It doesn't seem to have anything innovative about it and just levels the spec war with current generation consoles. So I don't see how it's ever going to get off the ground. This means I believe Nintendo will run into problems and INVN might be affected by those problems, as a recent profit warning already seems to show.

With this in mind, although INVN might be a decent growth stock, it might also make sense to wait for a while and let the impact on this June quarter be disclosed again, before speculating on the positive impact from the Nexus 7 tablet (which will probably hit in earnest only on the following September quarter).

Conclusion

The Nexus 7 having an INVN chip seems like a possible catalyst to make the market pay more attention to INVN's growth and reasonable valuation, making it a possibility for those seeking reasonable growth stocks for their portfolios. Still, it might pay to wait for another somewhat ugly quarter (INVN reports on July 24), before taking the plunge here on the Nexus 7 catalyst.

Disclosure: I am short AMZN.